Arbitrage funds are a type of mutual fund that helps investors make money by taking advantage of price differences in different markets. These funds mainly invest in stocks and derivatives, aiming to buy low in one market and sell high in another. This strategy can be particularly helpful in a heavily corrected market, where stock prices have dropped significantly.
When the market is down, many investors become cautious and may avoid investing in stocks. However, arbitrage funds can capitalize on these corrections. By buying undervalued stocks and selling them in a more favorable market, these funds can provide returns even when the overall market is struggling. This makes them a smart choice for investors looking to navigate tough market conditions.
Another benefit of investing in arbitrage funds is taxation. In India, arbitrage funds are taxed as equity funds. Here’s a breakdown of the taxation:
Short-term Capital Gains (STCG)
- Holding period: Less than 12 months.
- Tax rate: 15% (plus surcharge and cess).
Long-term Capital Gains (LTCG)
- Holding period: 12 months or more
- Tax rate: 10% (plus surcharge and cess) without indexation, or 20% (plus surcharge and cess) with indexation.
This tax efficiency allows investors to keep more of their profits.
Moreover, arbitrage funds can offer better returns than fixed deposits (FDs). While FDs provide a fixed interest rate, arbitrage funds have the potential to generate higher returns based on market movements. Historically, these funds have outperformed FDs, especially in a recovering market.
In conclusion, arbitrage funds are an excellent investment option for those looking to make profits in a corrected market, benefit from favorable taxation, and achieve better returns than fixed deposits. They provide a balanced approach to investing, combining safety with the potential for growth.
Article by;
Manoj Sharma
Director
Gular Wealth P Ltd
Mutual Funds are subject to to market risks. Please read the offer document carefully before investing.